The banking landscape is transforming across Europe. Driven by a combination of digital technology, an open ecosystem and the impacts of COVID-19, banking has changed beyond recognition. However, the real catalysts of change are customers. These digital savvy natives of all ages live their lives consuming streaming services, shopping online and dining at home using delivery apps. This digital drive has accelerated transformation in banking. Evidence of this can be seen by the proliferation of new digital banking offerings, from Fintechs to BigTechs, from niche apps to super apps. One question remains: is this a threat or an opportunity for traditional banks?
We have been exploring the challenges facing the banking sector in our recent research. At a global level, EY’s NextWave Global Consumer Banking Survey reveals how rising customer expectations and the competitive landscape are intensifying the need for banks to transform. It highlights they need to reinvent their business models to satisfy the needs of this next wave of customers, not just now but next, and beyond.
The importance of trust and transformation
Traditional banks remain the primary banking service provider for most customers. This relationship was underpinned by how they supported customers during the pandemic. Trust in these established brands has increased, leading to banks holding their positions – for now. Essentially, traditional banks operate from a position of strength. Our research shows that European customers who bank with a traditional provider, around four-fifths say they trust them completely or mostly.
Globally, of those who see incumbents as their main bank, 45% say they have had a relationship with their provider for more than 10 years. This rises to nearly 60% across Europe. Similarly, while 45% of respondents globally say they have three or more financial relationships, this falls to 36.5% in Europe. European retail banking customers are likely to have longer relationships with their bank than their global peers and fewer banking relationships overall.
But technology and digitisation have created opportunities for new challengers to emerge. They are taking a share of not just primary banking relationships, but other financial products and services too. Traditional banks continue to dominate primary financial relationships. More than three-quarters of customers in key European markets say that their main financial relationship is with a traditional bank. But neobanks are gaining ground. Just under 8% of respondents in these markets cite a neobank as their principal bank. That market share is consistent across all age groups — neobanks aren’t just for millennials, this is a societal shift driven by a new, broad wave of customers.
Challengers and competitive advantages
Beyond the primary relationship, challengers are gaining ground. In Germany, one-third of respondents say they use a neobank for a product or service. This compares with 13% in the UK and 5% in France.
While there is still time to counter the growing competitive threats, banks need to act now to protect their advantages. They must also build new business models capable of satisfying today’s consumer needs. They need to reinvent business models, evolve and scale to meet future needs and market developments. Banks may need to consider initiatives and partnerships that bring the skills, capabilities and functionality that neobanks are offering into their orbit.
Strategic considerations to remain ahead of the game
Given the trust and innovation gains they’ve made since early 2020, banks are well-positioned to keep momentum. They can make important strategic moves to navigate the new competitive reality. To do that, they need to consider how to achieve them, including:
Curating value through needs-based design: To keep their primary financial relationship status with existing customers, and to satisfy the new wave of customers, banks must pivot their traditional offerings to provide tailored solutions directly aligned to customer needs. A complete portfolio of digital self-service offerings needs to be at the heart of their portfolio.
Customers have a growing preference for a “one-stop-shop” with a Holy Grail of a super app that satisfies all their banking needs. Super apps combine multiple financial services – current and savings accounts, investments and payments – via one single digital experience. Typically, super apps have a higher degree of integration and customer-centricity than typical banking apps. This enables them to serve as consumers’ personal financial demand and to augment this with more holistic offerings centred around life needs, such as health, wealth and financial wellbeing.
Almost two-thirds of European respondents expressed an interest in super apps, bringing their whole financial services portfolio together. Owning a customer relationship through a super app offers the provider the opportunity to better tailor their own offerings and, in turn, help customers consolidate their banking relationships.
There are two aspects to success in this space. The first is having the technological and intellectual capability to create holistic digital platforms. The other is needs-based segmentation, and understanding the customer’s requirements is essential. That segmentation can only be achieved by a deep understanding of customer behaviours leveraging internal and external data sources.
Connecting experiences via embedded finance: Accessing financial services through non-financial platforms, creating seamless experiences is at the heart of embedded finance. These new customer journeys are enabled through digital ecosystems, driven by collaborations and partnerships. Developing an ecosystem offering, and enabling services beyond banking, can help traditional banks respond to increasing market competition and their profitability challenges.
Embedded finance is providing new propositions and innovative experiences to customers. Embedded finance is now proliferating into many customer moments of truth, offering financial solutions at the point of sale; purchasing a new sofa, booking a holiday or financing a car. They have even extended into smaller purchases, with online retailers offering embedded finance at checkout.
Personalising interactions: Banking leaders know they need to offer truly personalised, customised experiences across channels. The end game is to create segments of one so that customers are treated individually and uniquely at each-and-every touchpoint.
Pivoting to a customer-centric operating model: In the dynamic financial services marketplace of the future, the entire organisation must be designed for customer-centric ways of working. The way people work needs to be redesigned to reorientate back to customer needs, not just in the front line but as a pole down through the organisation realigning support functions and technology services to align back to the person who really matters and why the business exists, to serve customers.
Driving a platform for continuous innovation and scale: Without a robust platform approach, it is difficult to provide the level of digital self-service, personalisation and superior customer experiences necessary to drive growth. Platform enablement is about embracing the mechanics of scale to accelerate the transformation of customer-centric business models. It also promotes operational reliability and resiliency amid technological evolution. And again, this may be achieved through partnerships and collaborations with technology solution providers and also with those that may be your competition.
The potential and future of Irish banking
Irish banks have made significant progress when it comes to digital transformation and becoming customer-centric. A lot has been done, but there is a lot more to do to ensure the needs of the next wave of customers are met.
Ireland’s banks can strengthen their positions by reorientating their organisation around customer needs. They need to capitalise on the existing primary financial relationships they have and the wealth of pre-existing customer data they hold. These foundations, coupled with an innovative mindset, can pivot the challenges and looming threats into opportunities. Banks can leverage the new digital economy, pursue diversification and innovation. With the right focus, rigour and strategy, traditional banks can achieve profitable growth and a sustainable future.
The future of banking is bright. There is a once-in-a-generation opportunity for banks to truly transform and meet the needs of the next wave of customers.
This article was first published in the December edition of Finance Dublin.